Q: I need a few hundred pounds. Should I get a payday loan or take out a cash advance with my credit card?
Answer: There’s nothing worse then coming to the end of your bank balance just a few days before payday.
Urgent need for cash can make many of us borrow expensively by resorting to withdrawing on a credit card or exceeding our overdraft limit for example, but for getting a quick fix of cash at the last minute what is the best option?
Although designed specifically for this purpose, payday loans companies have a poor reputation and rightly so. Although offering a very quick and easy solution to your borrowing needs – you can get your hands on the money in hours, but at a cost.
Payday loans companies make their money by charging interest rates can be up to 1,750% on average, meaning the costs of missing a payment are huge.
New regulations for payday loans come into force as of 1 January 2015, with interest capped at 100% and default fees are capped at £15.
Withdrawing money on a credit card is still expensive, with 2-3% fees just for withdrawals, although as a last resort they are still a better option.
You will be charged interest from the moment you withdraw the money, but with credit card APR rarely going above 30%, it’s likely to be cheaper than a payday loan. The APR for a cash advance is typically higher than the standard APR on a credit card.
There are credit cards available with lower interest rates for cash advances, so if you think you’re likely to need, you could consider applying for a cash advance card to prepare.
For any other non-cash spending like food and household essentials however a credit card is probably your best bet, as long as you pay off the balance in full within the interest free period.
Credit unions and authorised overdrafts
Authorised overdrafts are probably the cheapest way to ensure you have access to an emergency fund and are easy to set up.
You should approach your main bank provider to whom your salary is paid and request an overdraft facility. They will run a credit check to authorise this.
Credit unions are another good alternative. These financial co-operatives are member-run and offer better rates for small loans under £4,000 than Payday loan providers. For more on credit unions see our dedicated guide.
• Student credit cards – Read our guide on student credit cards to learn more
• Student bank accounts – Struggling to choose a student bank account? Learn what to look out for here
• Credit cards: the uSwitch guide – All you need to know about credit cards and how to make the most of them